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Outsiders haven't been allowed a glimpse yet. But rivals are already feeling uneasy. Deep in the Czech Republic, in a town called Kolin, Europe's newest auto plant is being put through its final paces before a March debut. The ultra-low-cost manufacturing joint venture between Toyota Motor Corp. (TM
) and PSA Peugeot Citro?n (PEUGY
) -- combining Japanese production expertise with French parts-purchasing might in Europe -- is sure to up the ante for volume auto makers, who already have to worry about surviving on razor-thin margins. ``It will set a new benchmark,'' says Carl-Peter Forster, president of General Motors Corp.'s (GM
) European unit, which has announced 12,000 job cuts as part of a painful restructuring of its high-cost factories in Western Europe. Brace yourself, GM. Watch out, Ford Motor Co (F
). Take cover, Fiat (FIA
). The imminent opening of the $2 billion Kolin plant heralds a survival-of-the-fittest battle in Europe. The prize: mastery of Europe's $50 billion small-car market, which already makes up 32% of total car sales and is luring an increasing number of customers from the mid-size segment, where sales are shrinking. Kolin highlights how the rules of the game are being rewritten. To win in small cars today, combatants must pack vehicles with costly high-tech innovations but still offer a rock-bottom sticker price. To eke out a profit, auto makers have no choice but to slash manufacturing costs. The European front-runners in that race are the French and the Japanese, who are wielding innovative manufacturing strategies to defend profits. ``It will be clear how competitive the Kolin plant is when we announce the price of the new cars in March,'' says PSA's Daniel Marteau, vice-president in charge of cooperation agreements -- including the one with Toyota. Analysts expect the cars produced in Kolin to be priced at about $10,000, the going rate for European minis. But that price will include features normally found in more expensive models, such as an electronic stability program and four airbags. European auto makers have long excelled at making iconic small cars that sold in massive volumes -- from Fiat's Cinquecento and Volkswagen's Beetle to Renault's Twingo. But as the market morphed in the late 1990s and niche models proliferated, Fiat, Ford, Opel, and Volkswagen were caught off balance with high costs, bloated structures, and overcapacity, leaving them awash in losses. To succeed in this category, you need ``extremely lean production, high volume, and competitive labor costs,'' says Ferdinand Dudenhoeffer, director of the German Center for Automotive Research in Gelsenkirchen. That's a menu of strengths Europe's carmakers are struggling desperately to put together. Now Europe's laggards face another threat: The arrival of cutthroat Asian auto makers, which in just a few years have grabbed a sizeable 13.3% of the European market. The Japanese (Toyota, Nissan, and Honda) and the Koreans (Daewoo, Hyundai, and Kia) are getting traction in Europe with stylish cars priced around $10,000 to $12,000. Daewoo's sprightly Matiz and Hyundai's Atos are now a common sight along Rome's narrow streets and the elegant boulevards of Paris. The Toyota-PSA venture is the biggest threat of all. The streamlined Kolin plant will churn out a total of 300,000 small cars a year -- 100,000 each for Toyota, Peugeot, and Citro?n. The three models share nearly all their parts, except for exterior features such as the grill or headlights. Toyota's top managers say the Czech plant may even outperform Toyota's existing plants. The Kolin production lines were designed and built in Japan by Toyota's suppliers and tested in a virtual factory to ensure a smooth rampup. The Kolin factory will be run by some 30 Japanese and 10 French managers, while a host of engineers from the Tsutsumi factory in Toyota City will keep close tabs on the production engineering details.PRESSURED PANDAS?Exactly how big a squeeze will the Toyota-PSA venture put on the competition? That depends on the success of the three models -- the new Peugeot 107, the Citro?n C1, and the Toyota Aygo (pronounced ``I go''). Despite the extras packed into these cars, analysts say, Toyota and PSA are likely to squeeze an operating profit of 3% to 4% from their new minis, compared with rivals who only manage a profit of 1% to 2% on similar models. That spells trouble for Toyota's and Peugeot's European competitors. Fiat is likely to see sales of its new 8,600 euro ($11,500) Panda come under pressure, analysts say. New-generation small cars entering the fray include Renault's new 5000 euro ($6,000) Logan and a supersmall minivan called the Modus, both of which hit showrooms this fall. Meanwhile, Volkswagen is preparing to strike back with the European launch in 2005 of the Fox, a small-car model being built in Brazil. Of course, Toyota, Peugeot, and Citro?n will also go head-to-head against each other. But even if sales of one model far exceed the others, the Japanese-French joint venture is widely viewed as a win-win deal. Coming on the heels of Toyota's success with the 12,250 euro ($16,281) Yaris subcompact, the Aygo will burnish the Japanese giant's brand image in Europe -- a must for succeeding in the market for larger models and for its Lexus luxury brand. Plus, the joint venture with PSA allows Toyota to share the heavy expense of a new plant. ``We needed a partner to get the right volume for costs,'' says Shuhei Toyoda, the former president of Toyota Motor Europe who helped broker the collaboration with PSA. PSA too will be able to cut costs thanks to the Kolin venture. At the new plant, PSA managers will get a close-up look at Toyota's vaunted production methods and logistics structures, analysts say. Kolin, along with other cost-control initiatives, will help boost PSA's pretax profit margin from an estimated 4% in 2004 to 5.9% by 2006, according to a recent report by Robert Pottmann, auto analyst at M.M. Warburg & Co. The French and Japanese sister models will arrive in showrooms with perfect timing. A stagnant European economy is stoking sales of smaller cars. ``There is pent-up demand for affordable vehicles,'' says Christoph St?rmer, senior analyst at market researcher Global Insight Inc. in Frankfurt. Toyota and PSA, already primed for the toughest market conditions, should enjoy the ride. By Gail Edmondson in Frankfurt, with Chester Dawson in Tokyo